Ray Dalio Issues Blunt Warning for Real Estate

0:00The founder of the biggest hedge fund in the world just said that you shouldn't buy real estate in this market. Is this just more noise? More people who just want to push stocks or crypto or whatever? Or is investing legend Ray Dalio onto something? How risky is it for real estate investors right now?

0:24Hey everyone, welcome to On The Market. Thank you all so much for being here today. I'm Dave Meyer, and today I'm going to break down some recent warnings about the real estate investing landscape from one of the biggest names in finance and investing, Ray Dalio. Dalio has a pretty unique perspective, although he is retired now. He did manage the biggest hedge fund in the world. And personally, I've paid a lot of attention to what Ray Dalio says. Not necessarily because he is always right, because of course, no one is always right. But Dalio has a pretty interesting perspective on the national debt, which is something I worry a lot about.

1:03And I think it's something that you all should hear as well. And in general, I just think that hedge funds and the way they operate offer us as real estate investors an interesting and different perspective than we normally get. As the name suggests, Hedge funds exist to help investors hedge multiple asset classes, different currencies, different market cycles, not just to maximize their returns, but also to protect against downside risk. And I am not trying to be some hedge fund stan. Sometimes they massively outperform the market. Sometimes they get stuff wrong and underperform the market. But I just think that their way of thinking about risk and upside is particularly important in the very uncertain economy that we find ourselves in today.

1:54So in today's episode, we're going to explore how hedge funds think about risk and opportunity, whether Dalio's words of caution about real estate investing are worth heeding, and what you should be doing with your own portfolio. Let's do it. So first up, let's start with Ray Dalio's recent comments. Again, Dalio is the former CEO of Bridgewater, the biggest hedge fund in the world. And he recently commented that he would not advise investing in real estate right now. And he pointed to three reasons why he thinks that. First is that real estate investing is interest rate sensitive. Second, it's easy to tax.

2:31And third, it's nailed down, which makes it somewhat illiquid. And honestly, you can't really argue with any of those points. real estate is super interest rate sensitive. That would be almost impossible to argue against. Second one, how easy it is to tax. You know, I'm a little in the middle on this one. If you listen to a recent episode about property taxes, you know that it is hard to tax on a federal level, but it's easy to tax on a state and local level. And it is absolutely nailed down to the ground. At least I certainly hope so for any properties that you all own. But these characteristics of real estate, that they're interest rate sensitive, it's nailed down, it's easy to tax.

3:08Those things have always been true about real estate. So why now? Why is Ray Dalio saying this in this economy? To understand that, you need to understand Dalio's somewhat unique but very informed view of the world. He has written a few books about long-term debt cycles, how countries, yes, like the United States, similar countries in history have gone broke, and how the world order, according to him, has been changing. He's pretty prolific. He writes a lot of books. I've read several of them, so I think I can at least explain the high levels of his worldview. And I want to point out, you may disagree with this, but Dalio is definitely a student of economic history, and he does have some interesting ideas that I think are at least worth listening to.

3:58So the background you really need to understand when you're thinking about why he's saying don't invest in real estate is that Ray Dalio is hyper focused on debt. And I'm not talking about personal debt, although that is certainly a problem. It's talking about national debts, empires, big countries, and how much debt they take on. Because according to him, there are these sort of long term debt cycles. We talk about short term business cycles. Some people say it's five years or seven years or nine years. What he's talking about is these long term multi generational debt cycles that can make or sometimes destroy entire countries.

4:37He points to, in many of the books I've read, at things like the British Empire, the Dutch Empire, multiple Chinese empires, and all of them follow this pattern of accumulating too much debt over the course of their empire, which ultimately, when the debt gets too big, it destabilizes the country and the financial system, and it causes a crisis to occur. And when you look at the US and the patterns that have been going on here, not in the last few years, this is going back decades. But when you look at those patterns, Dalio thinks this is the path that we're heading down. He believes that the United States has entered a sort of end stage of our debt cycle, and that ultimately the United States is going to go into a financial crisis because we've just taken too much debt.

5:23Our debt has been growing continuously for 25 years. We've had a debt for way longer than that. But there was a point in time when Bill Clinton was president, where we briefly ran a surplus, but this has been going on for decades. Both parties do it. And to be honest, no one, either party seems serious about getting it under control. And he makes a lot of good points as to why this is a problem. Right now, 17 % of our national budgets for every dollar you send in taxes, 17 cents of that is going towards paying down our national debt. That is 17 cents that doesn't go to things like our military or schools or roads or whatever.

6:01It's just going to paying down your debt. That is a lot. And frankly, Dalio thinks it's going to get worse. He believes that there are these debt cycles that start to happen where basically you're paying a lot of interest like we are right now. Then that means that you can't maintain spending on essential programs because you're using all of your budget to pay down your debt. So what do you do to keep up those essential programs? You take on more debt. You're borrowing to pay debt. Basically, that's like taking out a credit card to pay off your old credit card, which everyone, I think, intuitively understands.

6:36You probably shouldn't be doing that because it's unsustainable. But there is a risk that the United States starts doing something like this. And again, this has happened in the British Empire, the Dutch Empire, some Chinese empires. That's why Dahlia thinks this could happen in the United States. Now, I'm saying could, and I think Ray Dalio agrees that this is not a foregone conclusion because there are ways that you can avoid this. You could spend less money, of course, and that could reduce the debt. You could have higher taxes and that could potentially reduce the debt. Or you could have some combination of those things.

7:10These are the commonly cited ways to control debt. And those are, frankly, I think the right ways to think about it. And I know different parties think differently about which one to focus more on spending less, higher taxes. But in theory, any of those things could potentially work to reduce the debt. But there is also this other option that doesn't get talked about as much, which is what Ray Dalio is super concerned about. And I think there is legitimacy to this concern. The third option is to just print more money. The United States is the world's reserve currency. It is also a fiat currency, meaning that is not tied to any hard asset like gold.

7:50And this gives the United States a lot of ability to just go out there and print more money. A lot of people, when they talk about the debt, right, they're concerned that the U.S. is going to quote unquote go bankrupt because of our debt. To me, that is super unlikely. Why would the United States default on its debt? Why would it go bankrupt when you could just print more money to pay that debt? And Dalio believes that the ease at which we can print more money is the most likely outcome for the U.S. economy in the next couple of years. Because when faced with doing unpopular things like raising taxes or cutting spending, what are politicians going to do?

8:31This is not a knock or political on either party, but politicians, largely self-interested people. So politicians, what are they going to do? They will probably opt for the easiest thing to do, which is print more money, which could actually even work on a short-term scale, but creates this long-term, very big problem for the United States. It works sometimes on a small scale, but at a large scale, it messes everything up. First and foremost, it can create inflation. And as we know, this kind of stinks for everyone, but it can really mess up the bond market because no one wants to lend the government money for long periods of time.

9:10If the currency they get repaid in is devalued. And as we talk about on the show all the time, as goes the bond market, so goes the mortgage market. And so if printing more money pushes borrowing costs up for the government, that's going to push borrowing costs up for mortgage holders as well. Who wants to lend you money for 30 years when the dollars that they're going to get repaid in in 5, 10, 15 or 30 years are worth a fraction in the future of what they are worth right now? So, again, this can drive up mortgage rates. So Dalio sees one of these things coming, right, because the debt is likely unsustainable.

9:50I get that there is modern monetary theory and that there is ways to grow out of this and there's ways to do it without inflation. But what we have seen over the last couple of years, the evidence that we have right now is that an increasing proportion of our national budget is going towards paying interest. And if that continues, then one of these things is coming for us, right? We're either going to have higher taxes, which can hurt spending, corporate profits, hurt the stock market. There are consequences to that. There could be lower spending. That also has consequences. It could reduce GDP, wage growth.

10:23It could cut important economic programs like Social Security, or we could have huge inflation, which is just a giant storm for the economy. Basically, he sees one of these things happening unless we get our debt under control in the near future. So I'm explaining that because it is within this context that Ray Dalio is saying that you shouldn't be investing in real estate. So there is a lot of thought that has actually gone into this, but is what he's saying actually makes sense. For example, if there is all this uncertainty, is a stable inflation hedge asset like real estate actually a liability or could it actually help you weather the storm?

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11:41Welcome back to On the Market. I'm Dave Meyer. I'm here talking about recent commentary from Ray Dalio about why you shouldn't invest in real estate right now. Before the break, I explained some context that Ray Dalio thinks we're going into basically a financial crisis, and that's one reason why he recommends not investing in real estate. But now let's talk about whether or not he's right. We need to decide, first and foremost, if we're on board with the financial crisis line of thinking, if that's where we're actually at. Then, even if you do believe that, then we need to talk about is real estate a good or bad asset class to hold in that scenario.

12:15Of course, people are going to feel differently and people use the word crisis really differently. And I want to say that there are currently very real economic issues facing us immediately. We're seeing signs that the labor market is showing some weakness. For example, American consumers are faltering. I personally don't believe we're out of the woods as of right now in August of 2025 with inflation and we need to see where that's heading in the next couple of months. Those are all problems, but none of those things would amount to what I would call a full-blown crisis. Those are unfortunate things.

12:50Those are signs of a weaker economy, but it is not a financial crisis. What Dalio is talking about is a full-on meltdown of the US dollar, of bond yields going skyrocketing, actual runaway inflation, the kind of thing that can ruin a country for decades. Is that actually likely? To me, I'll just give you my opinion. You might disagree, but I think if debt continues on the path it's on, yes, I don't think it's sustainable that we continue to pay more and more of our national budget to debt every single year. Are there ways that we can grow out of this? Sure. Are there ways that we can print more money without inflation?

13:28Some people seem to think so. But what I'm talking about is if our debt continues to be a greater and greater portion of our national budget, a greater and greater portion of our GDP, if that continues the way it's going right now, I do think eventually something's going to happen. There are consequences for taking on that much debt. But the thing about this is that we don't know at what point it actually has been a crisis because people have been talking about the debt being a huge problem forever, right? So is the crisis in six months? Is it in a year? Is it five years? 10? Is it 30? No one actually knows.

14:03And in the meantime, does something else happen? Does the debt get under control? Does the U.S. grow its way out? Does the government reign in spending? Maybe they raise taxes. So while I do think the current trajectory is scary and something worth considering, it is super hard to say with any specificity when it might actually come to a head. So personally, I have a hard time basing investing decisions on something that I have a really hard time forecasting out a timeframe for. But this is where we get to the second part of the show and why I think Ray Dalio's perspective is so helpful here. I can't make my investing decisions based on this, but do I want to position myself to hedge against it, to protect myself in case something like this does happen?

14:49I kind of think so. I think that's a really important thing for investors to think about. And we're going to get more into that in just a minute. But for now, I want to just do a thought exercise and presume he's right. You may not agree, but let's just go down this line of thinking for a minute. Let's presume he's right about this. Let's break down the things, reasons he said why he would not invest in real estate. So first it's interest rate sensitive. That's definitely true. And if you were worried about massive inflation in the coming years, and I mean decades long, not just like 2025, 2026, I'm talking about long-term inflation, then yeah, interest rates are a concern.

15:28Our mortgage rates long-term could go up if this scenario actually unfolds. I do believe long-term interest rate risk is relatively high. It's something I have real concerns about. I've talked about it multiple times on the show recently, but I think this is something that we need to keep in mind as we talk about hedging against some of this downside risk. The next thing he said is talking about taxes. I get that idea. Yes, you can levy a tax on property, but this one kind of seems more theoretical to me. It's not something I'm personally super worried about right now. It could happen in the future.

16:02But again, this just falls under the category of speculation to me that I find it hard to invest against. Third, he says liquidity or specifically he said it's nailed down. But his point is that it's not a very liquid asset, which is true. Real estate is not as liquid as cash or as stocks or as bonds or commodities. You can usually sell those faster than you could real estate. So that is something to really think about. But we also have to remember that Ray Dalio is talking about this as a hedge fund manager. This is someone who trades foreign currencies, who has done this in the past, who buys gold, who buys oil futures, who buys power plants.

16:40So he is thinking about moving his money out of the country into other currencies, into completely different asset classes. And maybe that does make sense for a hedge fund manager. Maybe there are some hedges that make sense for someone like Ray Dalio to do against a potential crisis. But perhaps this isn't something that the average American, the average member of the BiggerPockets community is realistically going to do. Are you going to sell a property and then move into some foreign currency or into cryptocurrency? Maybe. But as real estate investors, I think we have to approach this sort of from different vantage points.

17:19But overall, I think they're good points. Like if a crisis like this happens, a lot of asset classes are going to be impacted. So many of them, it's going to be hard to avoid it. And there will be implications for real estate if this full on financial crisis happens. So those are good points. But there are actually three things I wanted to call out. First and foremost, fixed debt in residential real estate. Yes, real estate is interest rate sensitive. That's something you need to be aware of. But if you fix your debt, it does limit your downside. Higher long term mortgage rates could weigh on prices.

17:50But if you lock in your debt, your ability to pay your mortgage is unlikely to be negatively impacted even in a financial crisis. Maybe if we have unemployment and double-digit unemployment, that might impact you. But the interest rate sensitive piece, if you have fixed rate residential debt, I don't think is as dramatic as he's pointing out because he's probably mostly talking about commercial real estate and not residential real estate. The second thing, which I'm surprised didn't come up, honestly, is that being leveraged, having debt can actually be beneficial in an inflationary environment because typically in an inflationary asset prices tend to go up.

18:32But if you hold fixed rate debt, like we just talked about, that means that you're still making the same payments, but the price of your asset is going up and your biggest expense, which is your debt is staying the same. So being in an inflationary environment, when you have leveraged assets can actually work out, okay, that will at least usually keep pace with inflation actually can be beneficial in some cases. And then lastly, I think that the other thing that's missing here is that in an inflationary environment, rents can and often do keep pace with inflation as well. So your income, again, assuming there's not just massive unemployment rates, but your income in terms of what rent you should be able to charge will also tend to keep pace with inflation, which I'm not saying there's no risk here, but is another sort of just counterpoint to Ray Dalio's point that there are some benefits, I believe, of holding real estate in this type of environment.

19:25So I think he sort of missed those points. But for me, the biggest takeaway, thinking this through, talking about this, is about commercial real estate and variable rate debt. We talk a lot about rates in the next year, three years, but we want, you know, I assume most people here want to hold real estate investments for a long time. That is the game. So long-term interest rate risks can really matter to us if it is variable debt. Like I said just a couple of minutes before, yes, real estate is interest rate sensitive, particularly if your mortgage is resetting every three or five or seven years like it does in commercial real estate, which is why I think that if Ray Dalio is right and if you want to hedge against some of the things he's concerned about, maybe you're concerned about too, commercial real estate, particularly adjustable rate commercial real estate is going to be, I think the riskiest asset class within real estate in this kind of environment.

20:24That's my main takeaway. I've said it for months now, but I think there is just this increasing risk for variable rate debt. And if you want to think like a hedge fund, if you want to think like the big guys and actually hedge against some of this downside risk, my advice to you is to focus on residential properties, using residential debt. Personally, I am not going to stop buying real estate because there may be some financial crisis at some point in the future. But given the trends with our debt, I am thinking about choosing more real estate strategies that will protect me in case there is a crisis.

20:58And fixed rate debt on cashflow producing assets is the way that I'm personally going to create that hedge. I just think hedging can be wise right now. It's not something we talk about a lot on this show. I'm not saying get out of the game and act scared, but protecting yourself against downside risk is smart when there is a lot of uncertainty. And although people in this industry don't talk about it a lot, we should. So after the break, I'm going to talk a little bit more about managing risk in the current market environment. We'll be right back.

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23:28Welcome back to On the Market. I'm Dave Meyer. Thank you all for being here. Earlier on the episode, we've talked about Ray Dalio's comments, but I want to shift to talk about the way that hedge funds think about risk and what we can learn about that as real estate investors. So hedge funds, what are they? They're basically meant to control risk. They look to create really stable portfolios that can weather huge storms, but still capitalize on upside. For me, that's sort of the game. I love that approach to real estate investing. Make sure that you're not going to lose your shirt, that you're protected against risk, but put yourself in a position to still capitalize on so many of the benefits that real estate investing offers us.

24:09And that's how I've always approached real estate personally, but it is how I am going to increasingly focus my portfolio in the next couple of years as we have this big macro, big picture uncertainty staring us in the face. And because of that, I think we can learn something from the way hedge funds think. Hedge funds generally approach risk in a very systematic sort of data-driven, and what I think is most important maybe is portfolio-based way. They're thinking about this not on an individual property, but across the entire portfolio. How do you manage risk? And they do this in a couple of ways.

24:46First of all, they think about not just upside and benefits to deals, but also risk and volatility. They ask themselves not just like, is this deal going to make money? But how volatile are the returns and what is the downside? And this is what I mean when I'm always blabbering on on the show about, quote unquote, risk adjusted returns. You can't just look at the potential upside of an investment. You have to consider what could possibly go wrong. And you have to weigh those two things. Just as an example, right? Imagine you get a deal that offers you a 15 % cash on cash return, but there's a 30 % chance that in any given year you go to zero, right?

25:26Would you take that over a deal where you get a 10 % cash on cash return, but the chance of going to zero is only 2 %? There's no right answer. But as a real estate investor in this type of environment, you need to be thinking about returns in the context of the risk that you were taking on. And that is, if you could teach you one lesson today, please listen to that. The second thing they think about a lot is just scenario and stress testing. Like what happens if mortgage rates go up? What happens if we see huge inflation? And I encourage you all to think about those things as well. I know it's not the easiest thing to think about, which is why we have shows like this one where I help hopefully help you all think through some of the implications of these things.